ESMA Clarifies MiCA Timeline and Urges Market Participants to Prepare for Transition

The European Securities and Markets Authority (ESMA) has outlined the timeline for the implementation of the Markets in Crypto-Assets Regulation (MiCA), encouraging market participants and National Competent Authorities (NCAs) to begin preparing for the transition. MiCA aims to enhance safeguards for holders of crypto-assets and clients of Virtual Asset Service Providers (VASPs), promoting financial stability and market integrity in the crypto-asset sphere, which is currently not regulated by existing European Union (EU) financial services legislation.

The entry into force of MiCA marks a significant development in establishing a single rulebook for the regulation and supervision of crypto-asset issuance, trading, and service provision. These activities are presently unregulated by existing EU financial services legislation, making MiCA a crucial legislative milestone for crypto-asset markets (including but not limited to cryptocurrencies). However, ESMA emphasizes that MiCA does not address all the various risks associated with these products. Many crypto-assets are highly speculative by nature and are vulnerable to novel operational or security risks due to the nascent stage of the underlying technology. Even with the implementation of MiCA, retail investors must recognize that there is no such thing as a 'safe' crypto-asset.

ESMA Clarifies MiCA Timeline

During the implementation phase of MiCA, which extends from its entry into force until the date of full application in December 2024, ESMA, along with the National Competent Authorities (NCAs) of the Member States and other European Supervisory Authorities (ESAs), is developing the technical standards and guidelines specifying how the new rules will apply to issuers, offerors, and Virtual Asset Service Providers (VASPs).

The first public consultations on these regulatory measures, conducted in two major packages published in July and October of 2023, represent significant milestones in the implementation of the MiCA framework. They translate ESMA's ambition to set high regulatory standards in the EU for crypto-asset services into concrete requirements.

However, it's important to note that full MiCA rights and protections will not apply during the implementation phase of MiCA.

It's crucial for holders of crypto-assets and current or potential clients of crypto-asset services in the EU to understand that, alongside the inherent risks associated with crypto-assets, the rules outlined in MiCA regarding the provision of crypto-asset services will not be enforced until December 2024. Consequently, during this period, they won't have access to EU-level regulatory and supervisory safeguards or recourse mechanisms provided by the Regulation. This includes the ability to lodge formal complaints with their NCAs against crypto-asset service providers. Given this timeline, it's essential for holders of crypto-assets and clients of crypto-asset services to be aware of the recourse mechanisms and protections currently available in their jurisdiction, if any.

Furthermore, even after MiCA becomes applicable to crypto-asset service providers, Member States have the option of granting entities already providing crypto-asset services in their jurisdictions and having a commonly called crypto license an additional 18-month "transitional period." During this time, these entities may continue to operate without a MiCA license, a provision often referred to as a 'grandfathering clause.' Consequently, holders of crypto-assets and clients of crypto-asset service providers may not benefit from the full rights and protections afforded to them under MiCA until as late as July 1, 2026. Similarly, most NCAs will have limited powers to supervise entities benefiting from the grandfathering clause, depending on applicable local laws.

Encouraging Supervisory Alignment

Throughout the transitional phase of MiCA, which extends until July 2026, a considerable number of entities already offering crypto-asset services in the EU are expected to continue operating under existing applicable laws in their respective jurisdictions. This scenario may arise if Member States widely employ the grandfathering clause mentioned earlier.

Among these entities are global virtual asset service providers (VASPs) that will persist in operating across multiple Member States using complex and opaque group structures. Besides the supervisory challenges this presents, these opaque group structures can make it difficult for clients to discern which entity they are dealing with and its regulatory status. Additionally, these entities may lack a robust compliance culture, including proper governance, organizational arrangements, and effective control frameworks. Their extensive scale and geographic reach allow them to maintain a high level of flexibility in terms of their operational scope, increasing the risk of conflicts of interest, regulatory arbitrage, and an uneven playing field in the provision of crypto-asset services.

To address the risks posed by global virtual asset service providers (VASPs) and to prepare for the implementation of MiCA, ESMA and its members are actively promoting coordinated actions across the Union. These actions include:

Facilitating the exchange of information between competent authorities on authorization requests and real supervisory cases in their jurisdictions.
Encouraging the early and uniform application of MiCA rules.
Consulting with the European Commission to establish a common understanding on MiCA provisions that may require further clarification.
The aim of these convergence efforts is to ensure alignment on supervisory expectations concerning entities offering crypto-asset services across EU jurisdictions during the MiCA transitional period. Additionally, these efforts seek to promote consistent practices to be used after the full implementation of MiCA, beginning with the authorization regime.

ESMA and its members are committed to establishing a robust regulatory framework characterized by consistent, effective, and rigorous supervision and enforcement in the EU from the outset.

Preventing Regulatory Arbitrage and Ensuring Compliance

To maintain the integrity of the regulatory framework, ESMA and NCAs are committed to preventing the establishment of so-called "letter-box" entities. These are EU-based virtual asset service providers (VASPs) that overly rely on non-EU entities to perform services for clients based in the EU. Additionally, they aim to ensure that the simplified authorization procedure is not misused as a means to gain a competitive advantage over other jurisdictions. Entities engaging in the unlawful provision of crypto-asset services before and during the transitional phase of MiCA will be subject to enforcement action under national applicable law.

Contributing to Effective MiCA Implementation

Market participants are encouraged to contribute to the effective implementation of MiCA. To ensure a smooth and orderly transition, ESMA advises market participants to make adequate preparations, reducing the risk of disruptive business model adjustments. Early dialogue between virtual asset service providers (VASPs) in the EU and the relevant competent authorities is crucial to inform them of their transition plans.

Beyond participating in public consultations, market participants falling under the scope of MiCA can take actions to facilitate a smooth transition and implementation. ESMA urges virtual asset service providers (VASPs), including already authorized financial entities, to:

Inform NCAs and clients of their transition plans as early as possible.
Clarify the regulatory status of the crypto-assets and/or services they offer to clients, specifying whether they are using the grandfathering clause, the type of authorization they hold, and the country of operation.
If authorized under other sectoral regulations, clarify the regulatory status of the products and/or services offered to avoid confusion regarding regulated offerings.
Align their practices to comply with the incoming requirements under MiCA in anticipation of its application.
Apply for a MiCA authorization as soon as possible to benefit from passporting rights within the EU during the transitional period. Failure to obtain a MiCA authorization will result in the loss of these rights.
Engage with NCAs to clarify any questions regarding the scope of MiCA and its application to your current activities.
virtual asset service providers (VASPs) in more than one Member State under local applicable laws must continue complying with all relevant local laws until the end of the transitional period.

ESMA emphasizes that MiCA strictly limits the provision of crypto-asset services or activities by third-country firms. Such services are only allowed in cases where they are initiated at the exclusive initiative of a client (the "reverse solicitation" exemption). While this exemption will be subject to further guidance by ESMA, it must be understood as narrowly framed and should not be exploited to circumvent MiCA. ESMA, along with NCAs, will take all necessary measures to actively protect EU-based investors and MiCA-compliant crypto-asset service providers from any undue incursions by non-EU and non-MiCA compliant entities under the European MiCA framework.